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Inside the Black Blocks a Policymaker’S Introduction to Blockchain, Distributed Ledger Technology and the “Internet of Value”

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Inside the Black Blocks a Policymaker’S Introduction to Blockchain, Distributed Ledger Technology and the “Internet of Value” MOWAT RESEARCH #168 | AUGUST 2018 Inside the Black Blocks A policymaker’s introduction to blockchain, distributed ledger technology and the “Internet of Value” BY MICHAEL CRAWFORD URBAN WITH DANIELLE PINEDA MUNK SCHOOL OF GLOBAL AFFAIRS & PUBLIC POLICY Acknowledgements The authors would like to thank those who participated in this research project as key informant interviewees and anonymous reviewers. A special thanks to Andrew Parkin, Sunil Johal, Kiran Alwani, Catherine Stinson and Reuven Shlozberg for reviewing the paper and for their helpful feedback, as well as Elaine Stam for going above and beyond in her design work for this report. Any remaining errors are the sole responsibility of the authors. Authors MICHAEL CRAWFORD URBAN DANIELLE PINEDA Practice Lead, Policy Intern Government Transformation Danielle worked at the Mowat Centre as a Michael joined the Mowat Centre as a Policy Intern from May to August 2017. She Policy Associate in January 2016 and took has also worked for Ontario’s Ministry of on the role of Practice Lead, Government Health and Long-Term Care, the Legislative Transformation in September 2017. He Assembly of Ontario and provided teaching brings a varied set of experiences to his and research support at the University of work at Mowat having worked at Global Toronto. She is currently a Policy Analyst at Affairs Canada in Ottawa – most recently AdvantAge Ontario. Danielle holds a Master as a Cadieux-Léger Fellow – with Elections of Public Policy and Honours Bachelor of Arts Canada and in the think-tank and NGO degree in Political Science and Media Studies sectors in Toronto and Ottawa. He holds from the University of Toronto. degrees from Queen’s University, Carleton University and the University of Oxford. Disclosure: Michael Crawford Urban owns a small amount of bitcoin and ether. MOWATCENTRE.CA @MOWATCENTRE 439 UNIVERSITY AVENUE The Mowat Centre is an independent public policy think tank SUITE 2200, TORONTO, ON located at the Munk School of Global Affairs and Public Policy at M5G 1Y8 CANADA the University of Toronto. The Mowat Centre is Ontario’s non-partisan, evidence-based voice on public policy. It undertakes collaborative applied policy research, proposes innovative research-driven recommendations, and engages in public dialogue on Canada’s most important national issues. ©2018 ISBN 978-1-77259-068-5 Contents Executive Summary 1 Introduction 5 1 A gap in the literature 6 What is a blockchain anyway? 8 2 Blockchain basics 8 Critical features 10 What problem is blockchain solving? 11 The “double-spend” problem 13 How blockchain works 14 What the fork? 19 Why mine? 21 The first digitally native value system 24 3 Digital commerce 24 New forms of economic activity 30 The dimensions of the blockchain revolution 34 Potential uses by the broader public sector 42 4 Electronic health records 42 Professional and post-secondary credentials 43 Government permits, licensing and “verifiable claims” 44 Implications for public policy 49 5 Competition in “governance services” 49 Decreasing effectiveness of “negative” regulatory frameworks 54 Novel legal questions 55 Governance 57 Recommendations 61 6 Build internal capacity 61 Create an attractive environment for blockchain innovation 64 Support allied and internal experimentation 67 Make greater use of standards and other flexible tools 68 Foster national and global governance cooperation 69 Conclusion 73 7 Key takeaways 73 Blinded by the hype? 74 Is blockchain the most important innovation since the Internet, or an over-inflated hype-bubble that will soon burst? INSIDE THE BLACK BLOCKS EXECUTIVE SUMMARY Is blockchain the most important innovation since the Internet, or an over-inflated hype-bubble that will soon burst? Either way, and even if the truth lies somewhere between these two extremes, rapidly growing interest in blockchain and its potential applications means that policymakers need to quickly develop an understanding of this new technology to guide their engagement with it. Fortunately, there is no shortage of information about blockchain available to policymakers wishing to learn more about it. Unfortunately, too many of the rapidly growing number of articles, YouTube videos, reports and Twitter threads on the subject are of limited use, for one of two reasons. On the one hand, many of these pieces are too superficial, speculative or insufficiently rigorous to be of much use to policymakers. On the other, pieces that do engage at a deeper level often end up losing the forest for the trees by focusing too narrowly on blockchain’s technical aspects. These accounts intimidate and confuse readers without technical backgrounds while the mass of detail they provide obscures many of the most important aspects of this innovation. Compounding this problem is the fact that few of either type of report are targeted specifically at policymakers. This report fills this gap by providing an accessible yet rigorous explanation of how blockchain works and a non-technical but still detailed analysis of the concepts and phenomena that underpin this explanation. It does so with an eye to the significance of blockchain and its potential applications for public policy as well as the potential that exists for governments to use blockchain to advance their own objectives. Throughout, the report also describes potential applications of blockchain and profiles a collaborative blockchain proof of concept conducted by the Government of Canada, the Government of Ontario and the City of Toronto. We begin with a discussion of what a blockchain actually is and highlight the six essential components of a true blockchain: » The ability of multiple collaborators to make additions to the blockchain. » A “write-only” design that ensures information can only be added to the blockchain and never deleted. » Hosting of the blockchain on a decentralized peer-to-peer (P2P) network. 1 | THE MOWAT CENTRE THEMOWAT | 1 » The use of a distributed consensus mechanism how blockchain, by empowering individuals and by the network for automatically reaching networks, may undermine the usefulness of decisions on whether to accept or reject many of the negative regulatory frameworks – proposed additions to the blockchain. frameworks designed to block certain activities – that governments have previously used to achieve » An incentive structure integrated into the many of their policy objectives. The third issue to blockchain’s software that ensures that the watch concerns the fact that blockchain’s spread nodes maintaining it work together. will likely create a host of novel legal questions » The use of cryptography to ensure the security, – such as how to regulate “smart contracting.” integrity and reliability of the information Finally, we examine the question of how the recorded in the blockchain and of the systems governance of blockchain technology and which manage it. blockchains themselves will need to evolve. We then provide an accessible and non-technical After identifying these issues, the report offers explanation of how a blockchain actually a set of preliminary recommendations for works. Often glossed over in other reports, we policymakers as they respond to blockchain’s explain the process in simple terms because arrival. These include a recommendation to build understanding these foundational details is internal capacity so that governments can stay critical to understanding the larger debates abreast of blockchain’s evolution and not be about blockchain’s potential and being able to entirely reliant on outside consultants. We also cut through the ubiquitous hype that so often discuss how to build an attractive environment surrounds it. for blockchain innovation in Canada. These Building on this explanation, we also identify first two recommendations both depend on, and explore the fundamental implications of and could help government support, internal blockchain’s emergence. To do this, we analyze and allied experimentation with potential the two channels through which blockchain blockchain applications so as to ensure that is likely to have its most important impacts: the public sector can access its potential by enabling greater automation and greater benefits. Insofar as applications of blockchain, decentralization in both the economy and society. such as cryptocurrencies, require regulation we Building on these ideas, we explore a number of recommend that government take a collaborative potential use cases in the broader public sector, approach that makes greater use of standards such as electronic health records, professional and other flexible regulatory tools. Finally, we and post-secondary credentials, as well as strongly recommend that the Government of government permit issuing and licensing. Canada actively lead the fostering of national and global governance cooperation on blockchain. We use this analysis to then identify four critical “Issues to Watch.” The first of these, competition in governance services, focuses on how blockchain enables a much wider range of actors to participate in the market for services, such as the provision of currencies, previously tightly controlled by governments. Second, we discuss 2 | INSIDE THEBLACK | 2 BLOCKS Informed by this analysis, the report closes by identifying three key takeaways for policymakers: » Blockchain marks the arrival of the first “digitally native value system.” This in turn lays the foundation for potentially revolutionary forms of automation by enabling software to do many new and important things that it cannot
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